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Do You Want To Invest In One Of These Companies...Think Again?

June 16, 2014 | About:
Suravi Thacker

Suravi Thacker

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Increasing health consciousness of people has pushed retailers to innovate and bring in new healthier products which will attract customers. Food retailers are in a pursuit to offer the best and the healthiest food options, that too at a comparatively cheaper price. Also, the morning breakfast segment has been one of the areas of focus for most of the companies, leading to a variety of options such as Greek yogurts, egg sandwiches and smoothies.

This has hampered the demand for cereals, a traditional breakfast style. Therefore, the cereal provider Kellogg (K) has been hit the hardest. This was evident when Kellogg posted its quarterly numbers which were not up to the mark, resulting in a decline of its share price.

Kellogg’s revenue dropped 3% to $3.74 billion, whereas analysts were expecting it to be at $3.82 billion. Revenue from the North American market decreased 2.9% over last year. Also, International sales softened due to a new food tax reform in Mexico. Nonetheless, the bottom line was at $1.01, higher than the expectations of $0.98 per share.

The competitive scenario

Even peers such as Post Holdings (POST) were also facing similar problems of lower cereal sales. Post Holdings too reported its first quarter results recently which failed to meet analysts’ expectations. Although its revenue grew 77% to $438 million over last year, the increase was mainly because of a host of acquisitions made by the company. In fact, revenue from Post Foods, which includes cereal business under the name of Post brand, fell 2.4% to $239.5 million.

Nonetheless, the food retailer plans to make another acquisition of Michael Foods in order to expand its list of offerings in the breakfast segment. The buyout will add products such as dairy products and eggs to its existing portfolio of breakfast items. Acquisition of Michael Foods in addition to a number of acquisitions made recently should help the retailer drive revenue higher.

Also, peer General Mills’ (GIS) last quarter results were not so attractive, with a 1% decline in revenue over the prior year, clocking in at $4.4 billion. However, the company’s efficient cost management measures drove earnings higher by 3% to $411 million. General Mills has adopted a different path to boost its sales. Unlike Post Holdings, it has opted for new product launches as a strategy to grow its business, especially in the gluten free segment. One of the growing segments for General Mills is the yogurt category since it has become very popular with customers. In fact, U.S. yogurt business grew 3% over last year, because of introduction of Greek Taste-Off during the quarter. Also, the food retailer has increased its advertising spending so that it can attract more customers to its products.

Therefore, it is not only Kellogg but also other industry players who are experiencing the problem of lower demand. However, each of them has a different strategy to revive their business.

Summary

However, Kellogg has been planning to make a number of efforts to lure customers. It plans to introduce new products which should lead to higher sales. Also, it is doing a good job of controlling its costs, which is evident from its bottom line. However, stiff competition from other food retailers, who provide alternatives to cereals, is a matter of concern. Therefore, staying away from these food retailers will be a prudent thing to do.


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